Thursday, April 28, 2011

Dirty Dozen Tax Scams from the IRS Explained

Every year the IRS releases a list of its top 12 tax scams, what they call the “dirty dozen”. This year was no different. Below is the list of scams and a brief summary. A very important point to remember is that whether you knowingly or unknowingly sign off on a return that is purposely misprepared, you are ultimately responsible for any unpaid taxes plus interest and penalties. So if someone comes to you with a tax avoidance plan that sounds too good to be true, chances are, it probably is.

1. Offshore income: This one is pretty straightforward. People try to stash money in other countries to hide income
2. Identity Theft & Phishing: Identity theft in this instance means using someone else’s information either to file a phony return and receive their refund. Phishing is soliciting personal information claiming to be a part of the IRS through email or websites.
3. Return Preparer Fraud: Another very straightforward scam. A preparer guarantees potential clients that they can either get them a refund or make it so they owe nothing. Often times these claims are made sight unseen or with only a cursory glance at a client’s information. Again, the client is ultimately responsible for any adjustments made, as well as penalties and interest. Also, the preparer may illegally skim off part of the refund.
4. Filing False or Misleading Forms: Filing of 1099’s or other tax forms that either show false deductible amounts or underreport the amount of actual income.
5. Frivolous Arguments: These are arguments made to support a tax position that the IRS has already deemed unreasonable and outlandish. A list of some of these arguments can be found on the IRS website.
6. Nontaxable Social Security Benefits with Exaggerated Withholding Credit: This scam is where a taxpayer excessively withholds tax money from their Social Security Benefits, which can lower their taxable income to zero. There is a $5,000 penalty for getting caught participating in this scheme.
7. Abuse of Charitable Organization and Deductions: There are a couple of different scams here. One is to use a tax exempt organization to shield income or assets from taxation. The other is the overvaluation of donated items. The IRS has been very determined in combating this particular scam.
8. Abusive Retirement Plans: Shady advisers have been known to encourage their clients to contribute more to their IRA’s than is allowed. There’s also the case where early distributions are improperly categorized.
9. Disguised Corporate Ownership: Where corporations are formed in certain states in order to disguise ownership. The hidden owners then use the dummy corporation to hide income, launder money, accumulate fictitious deductions and a number of other sundry activities.
10. Zero Wages: Fraudsters use this scheme to report zero wages by filing phony informational returns such as 1099’s and Form 4852 (substitute Form W-2) to counter act the real forms that report the actual income. Often times there will be an attempt to justify the adjusting filings using legalese to define away terms such as wages or even reasons why the company that filed the original W-2 or 1099 is incapable of filing an amended form.
11. Misuse of Trusts: These scams are where a trust, which is a valid financial instrument, is used to hide income and reduce estate or gift taxes.
12. Fuel Tax Credit Scams: Claiming a credit for fuel use that doesn’t actually qualify for the credit.

The lessons to be learned from this list are that the IRS is probably aware of any scheme someone might think up, you are ultimately responsible for the adjusted amount of tax owed for any hidden income or over valued deductions and that you need to be extremely wary of anyone making promises of the kind that guarantee refunds or no taxes owed.

1 comment:

  1. These scams are where a trust, which is a valid financial instrument, is used to hide income and reduce estate or gift taxes.

    ReplyDelete